UPDATED: HP Chairwoman Under Scrutiny After Probe

Hewlett-Packard Co. Chairwoman Patricia Dunn is under scrutiny from business and ethics experts after she oversaw an invasive and possibly illegal effort to snoop into the home phone calls of fellow HP board members.

Dunn, a former freelance journalist who has become one of the most powerful women in corporate America, oversaw the ouster of former HP CEO Carly Fiorina in February 2005 and the hiring of Mark Hurd as her successor. Now analysts say she may be the next one to leave.

"When you start spying on your own board, you darn well better have probable cause," said Peter Morici, professor at the Professor Robert H. Smith School of Business at the University of Maryland. "If the chairman thinks this is the way business ought to be conducted, maybe it's time for her to take a sabbatical. It's arrogant and inappropriate."

HP disclosed in a filing Wednesday with the Securities and Exchange Commission that the company sought the private telephone records of board members in a bid to determine which director leaked confidential company information to the media.

In the SEC filing, the company said it would decline to nominate one board member, George A. Keyworth II, for re-election because he was a source of the leaks. Keyworth, who has acknowledged leaking information, will end his service on the HP board no later than March 2007.

But HP also revealed that lawyers hired to review its tactics could not determine if the investigation "complied in all respects with applicable law," the company said in the filing.

California's attorney general subpoenaed some HP officials Wednesday and is examining the tactics of the investigation, which relied on a data mining method known as "pretexting."

In this case, investigators hired by HP called the phone company and impersonated at least one board member to get logs of phone calls to and from his home, said the attorney of a former HP director.

California Attorney General Bill Lockyer characterized the state's investigation as being in the "early fact-finding stage" and refused to say whether criminal charges would be brought against any director or the private investigators HP hired.

"I don't have a settled view on whether it was illegal yet, but it certainly was colossally stupid," he said in a phone interview Wednesday.

HP said in the filing it would cooperate with the state probe and that no recording or eavesdropping of directors' phone conversations had occurred. Spokesman Ryan Donovan said the company would not provide other further details of the investigation. Dunn declined to comment through Donovan.

Keyworth's departure comes after a January article on CNET Network Inc.'s News.com, which included a quotation from an anonymous HP source who described a gathering of HP directors at a posh spa in Southern California. Although the source didn't leak high-level strategic details or say anything inflammatory, the statement angered Dunn, who has been on the board for eight years.

At a board meeting in May, Dunn identified Keyworth as CNET's source, as well as the source of other leaks dating to early 2005. The board asked Keyworth, 66, to resign, but he refused.

The attempted ouster riled another board member, Tom Perkins, 74, who resigned and stormed out of the May 18 meeting.

In the months since his resignation, Perkins -- co-founder of venture firm Kleiner Perkins Caufield & Byers -- complained to other executives and journalists about the investigation's ethical implications. He decried it as an invasion of privacy.

His attorney, Viet Dinh, a former assistant U.S. attorney general, says he discovered that one of HP's private investigators also obtained the last four digits of Perkins' social security number.

The investigator used that information to open an online account with AT&T, Dinh said. The investigator then called the telephone company and impersonated Perkins, offering up his social security digits as proof of identity and asking AT&T to send a record of phone calls to and from his house in December 2005 and January 2006 to a free, Web-based e-mail account.

In August, Dinh asked the SEC to require HP to submit a regulatory filing with details of Perkins' resignation. HP acknowledged in the filing Wednesday that the SEC's Division of Corporation Finance sent the company a letter about Perkins' resignation.

Perkins was unavailable for comment but issued a statement through his lawyer.

"Despite this current disagreement, Tom Perkins has a warm place in his heart for HP and believes in the prospects and performance of HP under the leadership of Mark Hurd," Dinh said.

Dunn, 52, resigned as CEO of Barclays Global Investors in 2002 to battle breast cancer and melanoma, but she's taken an active role as chairwoman of HP, the 11th largest company on the Fortune 500.

She was one of the board members who hired Fiorina in 1999, but Dunn became disillusioned after years of lackluster stock performance and, in December 2004, wrote a four-page report to Fiorina detailing her concerns.

Dunn announced Fiorina's resignation in February 2005, and two months later introduced Hurd, who was favored by Keyworth and Perkins, among others.

Bruce Oliver, professor and director of the Center for Business Ethics at Rochester Institute of Technology, said Dunn had the right to seek out the source of leaks, but she crossed an ethical line in going after the home phone logs.

"To engage in some activity where you're hiring someone to do something on the QT where they're misrepresenting themselves, that's over the line of what constitutes ethical behavior," he said.

Experts say the fall of Enron Corp. and other recent scandals has made boards far more important in the governance of U.S. companies.

"The paradigm has shifted in the direction of the board as being at the top of the corporate governance pyramid," said Patrick McGurn, executive vice president and special counsel at Institutional Shareholder Services. "With that pressure, there's going to be greater opportunities for disagreement in the board room."

Others said the scandal could erode morale on HP's Palo Alto campus.

"This sends a message to employees that the company is willing to do just about anything to protect itself," said John W. Dienhart, business ethics professor at Seattle University. "This sends a bad message to existing employees, and it's bad for attracting good employees from outside the organization."

Hewlett-Packard shares fell 62 cents, or 1.7 percent, to close at $35.84 in Wednesday trading on the New York Stock Exchange.